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DanielParticipant
Powayseller,
I agree that the numbers look strikingly similar to those before the 2001 recession. I would go one step further: even the inflation numbers look the same; yes, inflation was getting pretty high in the summer of 2000, and the Fed had to go up to 6%.
I think the Fed will stop very soon (maybe it already has). Looking at the history of tightening cycles, inflation actually peaks about a quarter AFTER the last hike (meaning that the Fed can smell a slower economy is coming, and stops even before inflation turns down). About 6 months after the last hike the economy slows to near zero, and the Fed starts cutting. Recession usually starts soon after, and lasts for 3 to 6 quarters.
I think the Fed knows that we are very likely to have a recession next year. But as long as they can manage to keep it relatively mild (think 1990 or 2001), they will probably see this as an acceptable way to correct some of the imbalances in the system. The question is, of course, whether they can keep it mild. I personally don’t fear a depression and think that the Fed has pretty good odds, if not of a “soft landing”, at least of a “not really awful landing”. I guess we’ll have to see how this plays out.
DanielParticipantPowayseller,
Cagan’s report does take into account CLTV. On page 4, he explains how he computes the loan amounts, and he makes very conservative assumptions: he adds first and second mortgages, and then adds all the HELOCs on a property (since he doesn’t have access to current balances on those HELOCs, he assumes the full amount has been drawn).
So I believe his database is rather good, and, to my knowledge, this is the only public report that has statistics on CLTV amounts (stuff coming from NAR and CAR only reports LTV, which, as you point out, is quite meaningless).
As for his analysis, there he stops presenting facts and starts making some assumptions and projections. Naturally, projections and forecasts are debatable, and different people making different assumptions would arrive to different conclusions. Assuming 20% or 30% price drops would certainly change the results, and I think the reader is free to look at the data and see what would happen under different scenarios.
In my opinion, the greatest value of the paper is in making public the loan data. If anybody knows of any other public resource that has equal or better data, I would surely like to look at it.
DanielParticipantI would be very surprised if they cancelled ongoing projects in CV. Most likely they will slow down the construction pace, so they will release 6-7 houses per development every, say, 3 months, instead of 6 weeks. If demand falls even further, they might put things on hold for awhile longer.
DanielParticipantHi all,
Regarding the arguments about the percentage of exotic loans that are likely to get into trouble, I can suggest a paper that was published about half a year ago:
http://www.firstamres.com/pdf/MPR_White_Paper_FINAL.pdf
Some of you may be familiar with the paper or its author (Christopher Cagan, from First American Real Estate Solution). He has gathered pretty good data about exotic loans, and it’s all there in the paper.
He then proceeds to consider several scenarios (flat prices, down 10%, etc) and estimates how many people would be in trouble under each scenario. But, in my opinion, the best thing about the paper is that it provides the raw data, so a reader can make an analysis under different assumptions (for example, down 20%).
July 29, 2006 at 4:04 PM in reply to: Weiss Ratings: PIMCO and ProFunds earn E-, Chevron earns A #30045DanielParticipantCooper,
Feel free to take a stab at the question I asked Equalizer above. I read about those funds awhile ago, and could never figure out how they would replicate 2 * index (or minus 2 * index, for that matter).
Thanks,
DanielDanielParticipantPowayseller,
Thanks for posting these. They pretty much sum up everything that was said that has economic value. Maybe I should go back to the transcripts to also post the Q & A’s that have entertainment value.
July 29, 2006 at 3:24 PM in reply to: Weiss Ratings: PIMCO and ProFunds earn E-, Chevron earns A #30041DanielParticipantEqualizer,
I’m just curious: do you know how they claim to produce exactly 2 * index results? I don’t think this is mathematically possible. If you naively buy the SPY with 50% margin, your return will be (2*SPY – margin interest).
They probably use some option strategies, but no option strategy that I can think of is guaranteed to produce a 2 * index return. For example, selling puts at high strike prices at 2 to 1 leverage returns close to 2 * index most of the time; but if the market goes up sharply they’re left behind.
DanielParticipantLuckily the Fed has a certain degree of independence. The Fed governors are named by the President and confirmed by Congress, but they don’t have to run in elections every couple of years. God! Imagine we would have elections for the Fed! I can see the TV ad: “Ominous music…Ben Bernanke has raised your rates to 5.25%! Does he care about your rising mortgage payments? No! Does he care about your well-being? No! He is a slave of big business and Wall Street! He doesn’t deserve your vote!…optimistic music follows… John Doe will slash rates to 1%! Your mortgage payment will be affordable again! Vote for prosperity and progress! Vote John Doe! This message has been paid for by the National Association of Realtors”.
Thank God we don’t get to elect the Fed. If we did, using dollars as toilet paper would actually save money.
DanielParticipantMy opinion is that all this is bogus. I happened to watch (live) Ben’s congressional testimony, and he was a saint. Each representative rambled pure nonsense for 10 minutes before asking an idiotic question (like the one above). Ben would look serious, try not to laugh, and then would politely reply: “Yes, Sir”, or “No, Madam”, or “I don’t think I follow, Sir”.
Conspiracy theories are now more popular than ever. That doesn’t make them true. The fact (and this IS a fact) that conspiracy theories are most widespread among the uneducated underclass should be food for thought: if they think they can figure out the truth so well, how come they can’t get ahead? Conspiracy theories are mostly a denial mechanism for failure.
PS: Have you ever read stock message boards? When a stock goes up, everyone is a genius, and when it goes down, it’s all a big conspiracy. Give me a break. If a stock I buy goes down, I made a mistake. I can acknowledge that.
DanielParticipantYes, there are many posts since yesterday. Unfortunately, it seems that civility goes out the window when opinions differ.
I will try to summarize the facts of exotic loans in a short paragraph. I hope everyone will agree with these.
Exotic loan holders fall in 3 main categories:
1. Sophisticated buyers who don’t need I/O loans, but choose them as a financial planning tool. Believe me, it makes perfect sense for someone in a high tax bracket to take a larger loan that he/she needs to, and then pay lower taxes on dividends and capital gains (thank the government for that). Probably less than 5% of borrowers fall in this category. This was the only category that existed several years ago.
2. People who stretched to get into exotic loans, but will make it out alive, due to either (i) increasing incomes, (ii) having bought at lower prices in 2002-2003, (iii) managing to sell before it’s too late, (iv) cutting expenses and lowering living standars to “save the house”,
and (v) a combination of the above.3. People who stretched to get into exotic loans, and won’t be able to make it, despite their best efforts.
I hope we all agree that these are the 3 main categories, and that #1 above is just a sliver (less than 5%).
Where we don’t agree is on the percentages of #2 and #3. Powayseller seems to thing that most buyers are in category #3. Some beg to differ. I, for one, think that both category #2 and category #3 are quite large. On this aspect, I think we can just leave it at that, we have to agree to disagree.
DanielParticipantPowayseller,
I think that you fail to see the object of bmarum’s criticism here (blanket statements, black and white thinking and so on). It’s not necessarily what you say, but how you say it. I’d have to say that he/she is spot on.
DanielParticipantBmarum,
Totally agree with your point. There will be pain due to the lax lending standards, but many will survive. I also have a friend who got an exotic loan to get into a house a couple of years ago; I don’t think he and his wife will have any trouble meeting the increased payments.
Their incomes are probably double what they were 2 years ago.However, it is very likely that my friends will lose some money, even if no foreclosure or bankruptcy is on the horizon. If I buy a $700K house, I lose $200K when it drops to $500K, no matter what type of loan I have, or even if I paid cash. For those in strong financial positions (lots of equity or lots of cash) the pain may be bearable, but the amount of money lost is just the same. One could actually argue that those in 100%LTV suicide loans have less to lose than those who have large equity stakes.
July 28, 2006 at 2:42 PM in reply to: Leading Economists have NEVER predicted any of the last recessions #29959DanielParticipantThe bond market is pretty accurate at predicting recessions (flat or inverted yield curve). My bet is that we’ll have one fairly soon (early 2007). Lots of people hope we’ll have a repeat of the 1995 “soft landing”, but the odds don’t look very good…
DanielParticipantI think it will happen. Market forces demand it, and, for all their political influence, Realtors won’t be able to stop the trend. I think it’s only a question of how long they can delay it.
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